Eshan Nayyar

CM 2363
The papers must be typed, double-spaced and are generally not longer than
three pages. The papers are judged on content, clarity of thought, and logical
organization.
In writing these papers, you may assume that your audience consists of students in the
class. When appropriate, include graphs, equations, or math in your paper to convince
the reader that your argument is correct. Each paper is worth 100 points. Late papers
will be penalized 10% each weekday they are turned in past the assigned deadline

The final paper which is due Friday, September 28
th
, is to answer the following
problem:

Pork prices in China rose during August, 2012 both in large and medium sized
cities. Pork is Chinas staple meat. Corn and soybeans .. key ingredients in the
animal feed given to hogs .. have climbed to all-time highs as the worst drought
in 56 years has devastated crops across the grain belt in the United States. China
imports 60 percent of the soybeans traded in the world and it has become the
sixth largest importer of corn. Chinese pork prices have risen even though the
Chinese economy has been showing at a more rapid rate than expected. Using a
demand-and-supply diagram, illustrate and explain how these shocks have
affected the equilibrium price and quantity of pork in China.






Eshan Nayyar
CM 2363
China is the sixth largest importer of corn and also imports sixty percent of soybean
traded in the world. Soybeans and corn are the two main ingredients which are given
to hogs as an animal feed. These are becoming expensive and further leading to rise in
the price of Pork in China which is a staple meat for them.
This rise in the Soybean Price has occurred due to worst drought conditions in
agriculture which occurred in the United States. This can be shown graphically below.
There is less production and hence reduced supply of soybean in the market. This will
shift it from S to S1 making a new equilibrium which will move from E to E1.
Equilibrium point is where the demand curve which is downward sloping and the
supply curve which is upward sloping intersect. The equilibrium price and quantity
are the ones, where both the producer and the consumer are satisfied trading that
quantity at a particular price. The falling supply of key ingredients will lead to high
price of soybean in the market which will increase its price from P0 to P1 leading to
less quantity traded in the market which will shift to Q1.


This rise in price of grains leads to contraction in demand of soybeans and corn which
are required as animal feed for hogs in China. As the costs of feeding increase for
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Quantity of Animal Feed
Eshan Nayyar
CM 2363
them they will be discouraged to raise more hogs, thereby reducing the supply of pork
in the Chinese market. Soybean and Corn act as a complementary good to Pork.
Complementary goods are those which are jointly demanded. If the price of one good
rises in the market then the demand for the other good falls. So, a rise in price of these
grains will affect not just demand for soybean as an animal feed but also lead to a fall
in demand of pork due to higher price. The effect on market of pork in China can be
shown below. A rise in the grain price would lead to less supply of pork in the market
which will shift the supply curve to the left from S to S1, setting a new equilibrium at
E1 and raising the price of pork from P0 to P1 and therefore less quantity traded in the
market at Q1.


However, pork being a staple food for Chinese will have an inelastic demand. That
means a rise in its price will have a proportionately less fall in the demand of pork.
So, if people are not price sensitive to it and they keep buying at a higher price, this
might lead to inflation in the country as the weightage of food items is high in the
basket of goods. This would lead to high average price level and fall in the value of
money in China. Looking into this situation, the Chinese government should take
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Quantity of Pork
Eshan Nayyar
CM 2363
some measures to increase the supply of animal feed which in turn would increase the
availability of pork in the country. They can look for supplies of animal feed from
some other countries where it is cheaper so that they can reduce the adverse effects of
rising price level on their economy as inflation hits poor people the most and
generally, their proportionate spending on food is high. So, it has to come out with
measures to stabilize their prices.





















Eshan Nayyar
CM 2363

US Drought To Fuel China Pork Prices,
Inflation - Macquarie
08/24/2012 | 02:18am US/Eastern
By Chuin-Wei Yap
BEIJING--Global agriculture price increases driven by the ongoing U.S. drought are likely to put
upward pressure on China's pork prices and consequently drive inflation higher over the next 12
months, a senior Macquarie executive said Friday.

The dry spell in the Midwest has severely affected U.S. grain and soybean crops, which China depends
on to feed its hogs.

"I would be very surprised if you don't see a flow-on impact to China pork and inflation" in the year
ahead, Sydney-based executive director of Macquarie Agricultural Funds Management Tim
Hornibrook told Dow Jones Newswires in a phone interview.

Only 24% of the U.S. corn crop and 29% of U.S. soybeans remain in good-to-excellent condition, with
the stocks-to-use ratio--a measure of available supply--falling to 10% for corn, wheat and soybeans,
Mr. Hornibrook said, citing U.S. Department of Agriculture data.

"What that implies is that you have 72 days of supply on hand," he said. "Between 2003-04 and 2012-
13, this only occurred three times."

China heavily relies on foreign soybeans for hog feed, and pork prices were already set to rebound in
the fourth quarter due to tight hog supply. Brazil and Argentina may emerge as alternative large grain
suppliers, especially of corn, he said.

China's consumer inflation eased to 1.8% in July from 2.2% in June, though some economists warn
that inflation may rebound in the fourth quarter due to rising global agricultural prices.


Pork will keep China's inflation on the
back-burner
By Zhou Xin and Simon Rabinovitch - Analysis
BEIJING | Mon Aug 24, 2009 6:12am EDT


Reuters) - Pork, a trigger of past inflationary bouts in China, is likely to be a suppressant of price
pressures in coming months and give the government leeway to keep monetary policy loose until the
economic recovery is on solid ground.

A record flood of bank lending in the first half has fueled concerns that Chinese consumer price
inflation, in negative territory since February, could soon accelerate -- and accelerate quickly.
Monetary conditions are unquestionably crucial in determining the course of inflation, but recent
history has shown that China's single most important price is that of pork.
Food makes up a third of the Chinese consumer price index and pork is the key component of that. A
sweeping pig cull because of disease in 2007 sent pork prices soaring and sparked the country's worst
inflation in more than a decade.

At first glance, pig market trends are unsettling.
Retail pork prices have risen for 11 weeks straight and are up more than 10 percent during that time,
which would seem to augur for an aggressive rebound of inflation in China.
Eshan Nayyar
CM 2363
For a graphic showing the relationship between pork prices and inflation in China, double click-on:
here
But industry analysts and farmers said price rises would slow because an official pork stockpiling
program and a general reluctance to slaughter hogs will leave the country with a bigger pig population
than fundamental demand can s
Eshan Nayyar
CM 2363
upport.

"There is no possible way that we will see pork-led inflation again because of the general over-supply
of pigs," said Feng Yonghui, chief analyst for Soozhu.com, a hog industry website.
China needs about 410 million live hogs, including 41 million sows, for the market to be in
equilibrium, according to the National Development and Reform Commission (NDRC), a central
planning agency. Official data showed that China had 447.2 million live hogs and 48.3 million sows at
the end of June.

U.S. hog futures have plunged 34 percent in three months and could be dragged lower by swelling
supplies after a slump in export demand. China's pork prices have historically had little relationship to
world prices, because it satisfies nearly all of its demand domestically and exports next to nothing.
PRICE SIGNALS

In China, fresh pork cost 11.69 yuan ($1.70) per 500 grams in the week ending August 21, the NDRC
said. That was 11 percent higher than two months earlier, though still 20 percent below the 2008 peak.
"Maybe the short-term price rises can last until September, but we do not expect pork prices will
continue like that afterwards," said Guo Huiyong, an analyst who follows animal husbandry at Beijing
Orient Agri-Business Consultant.

Low prices earlier this year meant that breeders were barely breaking even after soymeal-based feed
costs rose, which might have discouraged them from raising more hogs. It takes six months to raise a
hog for slaughter, so the ebb in prices could theoretically crimp the pork supply by the end of this year.
China's central bank said last month that the consumer price index, which fell 1.8 percent in the year to
July, would start rising in the fourth quarter; in other words, the pork supply shock could hit just as
broader price pressures perk up.

This, in turn, could force the central bank into raising interest rates prematurely. With signs that the
economy's momentum has slowed a touch in recent weeks, most analysts think Beijing wants to keep
monetary policy loose well into next year.
But the government, keenly aware of the 2007 pork-led inflation precedent, has stepped into the breach
with a stockpiling program. Much as China has supported its metal producers and grain farmers by
buying excess supply, it began in June to do the same with pork.
Its initial purchase of 120,000 tonnes of pork, while paltry next to China's annual output of more than
40 million tonnes, was enough to put a floor under the price -- and to encourage hog restocking, even
though not justified by real demand.
"The overall supply of pork will still be in surplus in coming months. The government's stockpiling has
given the market and breeders a misleading signal," Guo said.

NO SLAUGHTER
Another factor keeping pigs in ample supply is the basic reluctance of farmers to cut stocks. Many
came to regret the huge cull in 2007, a reaction to the spread of blue-ear disease, when subsequent pork
shortages led prices to soar by 50 percent.
"Household pig farms may not make money from hogs, but they can still make money from selling
piglets, so there was no massive slaughter even in the worst days," said Zhao Huian, manager of a pig-
farm cooperative in Xiangtan, Hunan province.
At current pork prices, in fact, breeders can earn about 100 yuan per head.
"Pork sells very well recently and we can make a decent profit from it. I do not think the good situation
will change soon, at least in the short term," said Shao Zuohuan, a farmer in Zhejiang Province.
Officials are confident that price rises will be capped.
The Shanxi statistics bureau concluded that live hog stocking was on the rise, limiting the scope for
price increases, after a survey of 182 large pig farms and 166 rural households.
The Hunan statistics bureau, which surveyed 37 pig-producing counties, forecast that live hog prices
would hover in the range of 10-11 yuan per kilogram over the rest of the year, basically level with
current prices.
Feng, the Soozhu.com analyst, said many big pig farms had made lots of money in the last round of
pork price inflation and could patiently wait for the next round of rising prices.
"With plenty of cash in hand, they can endure even the longest winter," he said.
The over-supply will continue until there is a steep cull of sows, something which will not occur until
there is a new disease outbreak or the bankruptcy of big pig farms, Feng said.
Eshan Nayyar
CM 2363
(Additional reporting by Niu Shuping and Shao Xiaoyi; Editing by Jan Dahinten)